Solo 401K Plans for Self-Employed

The Individual 401k is the newest and most exciting retirement plan to benefit the self employed, thanks to the recent tax law created by the Economic Growth and Tax Relief Reconciliation Act of 2001.

The Individual 401k plan has several benefits for small business owners and the self employed.

• Higher Contribution Limits
• Tax Deductible Contributions
• Tax Deferred Growth
• Contribution Flexibility
• Access to Tax Free Loans
• Cost Effective Administration
• Retirement Plan Consolidation

What makes the Individual 401k unique is that compared to other self employed retirement plans greater contributions may be made at identical income levels, therefore maximizing retirement contributions and valuable tax deductions. Individual 401k contribution limits are $52,000 in 2014 or $57500 in 2014 if age 50 or older.

Also, an Individual 401k allows the flexibility to borrow against the value of your 401k. Tax free loans (up to 50% of the total 401k value with a $50,000 maximum) are permitted in an Individual 401k plan.

Self employed business owners may be well suited for an Individual 401k if their objective is to maximize their retirement contributions or if they would like to borrow from their retirement plan using their 401k balance as collateral via a tax free Individual 401k loan.

Individual 401k contribution calculation for an S or C corporation or an LLC taxed as a corporation

• Salary Deferral Contribution
  In 2012,100% of W-2 earnings up to the maximum of $17,000 or $22,500 if age 50 or older can be contributed to an Individual 401k (2011 limits are $16,500 or $22,000 if age 50 or older).
• Profit Sharing Contribution
  A profit sharing contribution up to 25% of W-2 earnings can be contributed into an Individual 401k.

Individual 401k contribution calculation for a sole proprietorship, partnership or an LLC taxed as a sole proprietorship

• Salary Deferral Contribution
  Although the term salary deferral is used, these businesses do not provide a W-2 salary to the business owner. For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax. In 2012, 100% of net adjusted business profits income up to the maximum of $17,000 or $22,500 if age 50 or older can be contributed in salary deferrals into an Individual 401k (2011 limits are $16,500 or $22,000 if age 50 or older).
• Profit Sharing Contribution
  A profit sharing contribution can be made up to 20% of net adjusted businesses profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax. You will want to ask your tax professional for assistance with this calculation.

Roth Individual 401k

Individual 401k salary deferral contributions can be made as Roth 401k (after tax) or Traditional 401k (pre-tax). The basic difference between a Roth 401k and a Traditional 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions.

More info on Roth 401k's

Contribution Flexibility

Each year the funding of your individual 401k retirement plan is completely discretionary. You can increase or decrease your salary deferral and/or profit sharing contributions depending on the profitability of your business.

Individual 401k Eligibility

The Individual 401k is available to self-employed individuals or business owners with no employees other than a spouse. Sole proprietorships, partnerships and corporations (including both subchapter S and C corporations) would qualify.
A business that employs part-time W-2 employees may be able to exclude them from plan participation. Independent contractors (1099 employees) employed by your business are excluded from the plan and would not disqualify you from having an Individual 401k. Generally, under federal law you are permitted to exclude the following types of employees:

• Employees under age 21.
• Employees with less than one year of service.
• W-2 employees who work less than 1000 hours per year.
• Certain union employees.
• Certain nonresident alien employees.

Individual 401K

Top 3 Mistakes in Solo 401(k) Plans

Can My Solo 401K plan invest in gold?
"The IRS does permit a Solo 401K Plan to own certain gold coins (American Gold Eagle coins or coins at least .995 fine (99.5% pure)), one ounce silver coins minted by the Treasury Department, any coin issued under the laws of any state, a platinum coin described in 31 USCS 5112(k); and gold, silver, platinum or palladium bullion of a certain fineness that is in the physical possession of a financial institution."

Can I Use a Solo 401K to Buy Gold?

Post Updated April 25, 2015